Lease and a Loan - Question

odeamarcas

Hi,

I wonder if anybody can help me address this issue. I am writing a business plan for gent that is applying for a bank loan for a bar lease. The required / requested loan repayment period is 10 years. However, the lease for the bar is only for 4 years and 9 months.

Naturally enough the bank have raised the issue of the possibility of having loan amounts outstanding should the lease option not be renewed or offered.

Has anybody any experience with how this is normally addressed by tenants?

Thanks.

Graham

The obvious approaches would be; negotiate a longer lease, negotiate a guaranteed option to renew, borrow money over a shorter term.

Why would you want a 10 year loan term to finance something you may only have for 4 years 9 months?

odeamarcas

Thanks Graham. I'm not familiar with commercial leases, but for some standard reason (somebody with a commercial property understanding would explain this) the usual term of a lease is 4 years and 9 months. Most likely because additional unfavorable tenant privileges come into play after a 5 year tenancy.

A 10 year loan is preferable because of the repayment requirements, anything lower makes the repayment too high.

Naturally the goal is to remain in the premises for longer than 4 years 9 months, but that isn't an option at the moment.

Hopefully somebody with experience of this can shed a bit of light..

Graham

odeamarcas wrote: »

A 10 year loan is preferable because of the repayment requirements, anything lower makes the repayment too high.

What were you planning to do if the lease ended in 4yrs 9 months?

odeamarcas

That's why I posed the question, I'm looking for advice, not smart rhetorical questions.

Alan Shore

odeamarcas wrote: »

That's why I posed the question, I'm looking for advice, not smart rhetorical questions.

I think the query that is being raised is what is the loan for? If it's €100k for refurbishment well then clearly you need a 10 year lease!

odeamarcas

Yes Alan, I think I should have worded the OP better. The loan is for refurbishment (minor), stock, audio and video equipment, working capital. There is no charge for the lease in itself, no key money.

To manage cash flow in the early stages the loan repayments need to be minimised. Hence the required 10 year loan repayment period. But the lease offered is only 4 years 9 months. I have heard this term numerous times in discussions about commercial properties but I don't know anything about the logic behind it and how people overcome it when they are required to invest significant capital up front in order to be able to operate the lease.

Graham

odeamarcas wrote: »

That's why I posed the question, I'm looking for advice, not smart rhetorical questions.

Hardly a smart rhetorical question.

It sounds like you've already been to the bank and they (quite sensibly) have said no. What would you have done if they said yes?

Back to my original suggestions

negotiate a longer lease
negotiate a guaranteed option to renew
borrow money over a shorter term

+ 1 new option

put more money into the venture up-front

odeamarcas

done some googling: The answer lies in acquiring a 5 year lease with an automatic renewal. Seems the law caters for some of your suggestions Graham.

1. Firstly, the holder of a 5 year commercial lease is entitled to an automatic renewal of the lease on the same basis as the previous lease. Accordingly, the reason the landlord is only offering 4 years 9 months is to avoid giving you, as tenant, the right to a new 5 year lease on the expiry of this lease. Secondly, a right to buy changes the nature of the lease. The right to buy can be registered on the property REgistration Authority (PRA) folio and will affect the ability of the landlord to charge or mortgage the property during the currency of the 5 year lease. Accordingly, it reduces its saleability as well as its usability during the 5 year lease. Accordingly, this is not a very attractive proposition.

Graham

I think your last sentence hits the nail on the head.

As you've realised, you could spend a small fortune doing up the place, building up a trade, making a name etc etc etc all for nothing when you hand the keys back in 2020.

Avatar MIA

The obvious answer is only refurbish enough that can be repaid back in 4 years 9 months.

If that is not sufficient and the landlord wont increase the lease term, walk away.

The bank wont finance something that cannot be paid back within the possible life of the asset (the asset which generates the funds to repay the loan).

Another possibility is that the landlord undertakes the refurbishments and adds the cost to your repayments.

If anything the bank has done you a favor here.

delahuntv

Unfortunately the bank (and common sense) says a 10 year loan term for a business that only has a 4year 9month lease, just doesn't add up.

It means the business is not viable based on the figures provided.

It also seems a high sum for what seems to be a smallish business.

Even a good refurb shouldn't cost more than about 20-25k for a small premises.

Stock should be less than 20k as if its pub/food, deliveries are made weekly or more often.

Maybe give some more info, but current info of 100k being required and figures showing it can only be paid back over 10years would raise red flags.

Graham

Unless the business is being used as a stepping stone to something else I'm not sure I'd go anywhere near it.

Can an alternative location be found with a more realistic lease?

When Weatherspoon first started in the UK they deliberately avoided taking on pubs, many of their earlier outlets were converted from old high street supermarkets. There's a few old branches of Woolworths where you can now go and quaff a reasonably priced pint. Of course in the UK licenses are much easier to come by but since the end of the Celtic Tiger buying a pub license in Ireland is a much more realistic proposition than it used to be.